Following the UK’s departure from the European Union more than a month ago, markets are braced for a global health crisis that will bring with it a supply shock. The RSM Beyond Brexit Index — which measures financial and economic stress or risk following the UK’s departure from the EU – has shot up in the past 10 days from zero to 1.15 standard deviations above normal levels of implied stress (see index below).
Simon Hart, Brexit partner, comments: ‘Growing stress in the UK’s financial markets caused by the global public health emergency (Covid-19) will require both fiscal and monetary fire power to support UK middle market business and address supply chain shocks and demand-lead contraction cascading through the global economy into the UK’s.
‘Instead of simply measuring the risks to UK economic growth during the months of trade negotiations to come, our index is clearly showing the shock to the UK economy caused by the coronavirus outbreak and the effects on the global economy that is occurring.’
Also commenting on how the Bank of England (BoE) might react, Simon comments: ‘‘With markets reacting to the crisis and the accompanying supply shock, it’s likely we could see the BoE cut its base rate by 0.5 per cent in the next couple of days rather than wait until its next scheduled meeting on 26 March.’
Performance of index components
The RSM Beyond Brexit Index is made up of six components; they include the British pound-euro exchange rate and its volatility, the FTSE 100 and its volatility, the gilt yield spread and the UK corporate bond spread.
The pound has lost 3 per cent versus the euro since 31 January starting point for Brexit, and 3 per cent against a basket of currencies from the UK’s trading partners, all on higher volatility. This loss of buying power is likely to have negative implications for household balance sheets, which could drag down consumer spending in the months ahead.
The FTSE 100 has lost 8 per cent of its value since 31 January on higher volatility. This decline follows the worldwide loss of confidence afflicting the major stock exchanges.
Ten-year gilts are yielding only 0.33 per cent, losing 20 basis points since Brexit’s start date on 31 January. The government yield curve remains inverted, which signals concern for both short- and long-term growth. The corporate bond market is pricing in substantially more credit risk than before the coronavirus outbreak.